Supreme Court reaffirms Ninth Circuit and limits arbitration options
April, 2008
At the end of March, the Supreme Court of the United States held that the grounds for vacating an arbitration award under the United States Arbitration Act (FAA) are limited to those set forth in the federal statute alone. As one of the dissenting justices (Stevens) aptly noted, the ruling completely negates the ability of parties to draw upon their own creativity in fashioning alternative judicial review provisions in private arbitration agreements that are both reasonable and consensual. We share the dissent's view that this outcome is unfortunate.
1. What the Parties Had Tried to Do
Presumably, both Mattel, the toy manufacturer, and its landlord, Hall Street Associates, were sophisticated business entities. They recognized that in an arbitration, only two things matter: who the arbitrators are, and what the standard for judicial review is, in case the award (at least in one party's judgment) is completely out of kilter. So they fashioned a clause in their arbitration agreement that said the reviewing Court would have to vacate the award if "the arbitrator's conclusions of law [were] erroneous." While holding such a provision to be unenforceable, the Supreme Court nonetheless followed the Ninth Circuit's lead (Kyocera II) and was willing to otherwise sustain the arbitration clause itself.
2. What the Case Settled
Until the Hall Street opinion came down, there was utter chaos in the federal circuits. The Ninth and Tenth Circuits held that parties may not contract for expanded judicial review. The First, Third, Fifth and Sixth Circuits, on the other hand, went in exactly the opposite direction. The Fourth Circuit joined the latter group, albeit in an unpublished opinion. Lastly, in dicta, the Eighth Circuit expressed agreement with the more restrictive view. However, with Hall Street as now the law of the land, expanded review under the FAA will be impossible unless and until the case were to be reconsidered, which seems unlikely any time soon.
3. The Practical Impact of the Decision
Creative legal minds have set about fashioning alternative dispute resolution mechanisms to streamline more traditional litigation routes, guided by efficiency and cost-effectiveness. But in so doing, they have also recognized that ADR ordinarily lacks the decisional transparency that comes with a reasoned court opinion. Hence, as a balancing mechanism, parties to arbitral agreements have often tried to fashion judicial review clauses such as the one found in Hall Street, in order to provide a safety net against a bizarre legal result at the hearing level. The opinion now prohibits that activity, at least in those situations where one of the parties seeks expedited judicial confirmation of an arbitral award under the federal act.
4. State Court Counterparts
The Washington situation can be characterized as both more and less complicated. On the one hand, since at least 1992, our Supreme Court has made clear that parties may not insert into their arbitration agreements clauses that provide for judicial review beyond what is specified in the state statute. One must remember, however, that this mandate arose under the former legislation, repealed by adoption of the Uniform Arbitration Act as Chapter 7.04A, effective January 1, 2006. That said, nothing in the Uniform Act would purport to adversely impact the Supreme Court's pronouncement on the earlier law. If anything, the Uniform Act is textually more restrictive.
But the issue runs deeper. At the intermediate appellate level, Washington courts have held on their own that either an erroneous rule of law or mistaken application thereof is a ground for vacation or modification of an arbitral award under the (old) State statute. However, the error must appear on the face of the award itself, or "at least some paper delivered with it." There is no specific, express statutory language, either in the old Act or the new one, to support this. It can be argued that the Washington relief valve, as so configured, provides for a level of judicial appellate scrutiny similar to that contractually sought by the parties in Hall Street Associates. On top of that, the Washington standard also seems to be conceptually looser than the cognate federal standard of "manifest disregard of the law," although the federal rule has been anything but consistent in its application. Finally, Justice Souter's pejorative treatment of the "manifest disregard" concept in the majority opinion, albeit in dictum, could spell a further erosion of the federal doctrine itself.
5. The Bottom Line
All of this is much like the arms race. As decisional law keeps the ambit of judicial review of arbitral awards within narrow confines, creative commercial lawyers seek ways around that, and then the process begins anew. However, since there is still ambiguity and uncertainty, probably the most that can be said for the Hall Street opinion is that it ups the ante for the needed legal ingenuity. For all the varied benefits of ADR approaches to problem solving, lawyers and clients who believe they can safeguard their downside in the event of legal error, even hideous legal error, are well-advised to proceed cautiously and think twice. And after Hall Street, one approach is basically gone for good, at least in the federal system.